The summer before your freshman year in college means choosing classes, checking out your future roommate’s Instagram and figuring out how you’re going to pay the bills.
Chances are you will need a loan: 2 out of 3 students have debt when they leave school, according to 2017 graduate data from the Institute for College Access and Success. But consider a loan after you’ve accepted grants, scholarships and work-study. You can get these by submitting the Free Application for Federal Student Aid, or FAFSA.
Here are six things you need to know about getting your first student loan.
1. Opt for federal loans before private ones
There are two main loan types: federal and private. Get federal loans first by completing the FAFSA. They’re preferable because you don’t need credit history to qualify, and federal loans have income-driven repayment plans and forgiveness that private loans don’t.
You may be offered two types of federal loans: unsubsidized and subsidized. Subsidized loans — for students with financial need — don’t build interest while you’re in school. Unsubsidized loans do.
Take a private loan only after maxing out federal aid.
2. Borrow only what you need — and can reasonably repay
Independent undergraduate students can borrow up to $12,500 annually and $57,500 total in federal student loans, while dependent undergraduate students can borrow up to $7,500 annually and $31,000 total. Private loan borrowers are limited to the cost of attendance — tuition, fees, room, board, books, transportation and personal expenses — minus financial aid that you don’t have to pay back.
Aim to borrow an amount that will keep your payments at around 10% of your projected after-tax monthly income. If you expect to earn an annual salary of $50,000, your student loan payments shouldn’t be over $279 a month, which means you can borrow about $26,000 at current rates.
To find future earnings, look up average salaries in the U.S. Department of Labor’s Occupation Outlook Handbook. Then, use a student loan affordability calculator to estimate payments.
Your school should provide instruction on accepting and rejecting financial aid in your award letter. If you’re not sure how to do it, contact your financial aid office.
“We’re not scary people,” says Jill Rayner, director of financial aid at the University of North Georgia in Dahlonega, Georgia. “We really do want students and families to come in and talk with us so we can help strategize with them.”
3. You’ll pay fees and interest on the loan
You’re going to owe more than the amount you borrowed due to loan fees and interest.
Federal loans all require that you pay a loan fee, or a percentage of the total loan amount. The current loan fee for federal direct student loans for undergraduates is 1.057%.
You’ll also pay interest that accrues daily on your loan and will be added to the total amount you owe when repayment begins. The fixed federal undergraduate loan interest rate is currently 3.73%, but it changes each year. Private lenders will use your or your co-signer’s credit history to determine your rate.
4. After you agree to the loan, your school will handle the rest
Your loan will be paid out to the school after you sign a master promissory note agreeing to repay.
“All the money is going to be sent through and processed through the financial aid office — whether it’s a federal loan or a private loan — and applied to the student’s account,” says Joseph Cooper, executive director of the Student Financial Services Center at Michigan Technological University in Houghton, Michigan. Then, students are refunded leftover money to use for other expenses.
5. You can use loan money only for certain things
Loan money can be used for education-related expenses only.
You can’t use your loan for entertainment, takeout or vacations, but you should use it for transportation, groceries, study abroad costs, personal supplies or off-campus housing.
6. Find out who your servicer is and when payments begin
If you take federal loans, your debt will be turned over to a student loan servicer contracted by the federal government to manage loan payments. If you have private loans, your lender may be your servicer or it may similarly transfer you to another company.
Find your servicer while you’re still in school and ask any questions before your first bill arrives, says John Falleroni, senior associate director of financial aid at Duquesne University in Pittsburgh. They’re also whom you’ll talk to if you have trouble making payments in the future.
When you leave school, you have a six-month grace period before the first bill arrives.